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Integrity in the Boardroom: What Does It Really Mean?

Integrity is critical to an organization’s culture and a requirement for effective dynamics in the boardroom. In view of recent headlines, a valid question is: What is integrity? Merriam-Webster defines integrity as “firm adherence to a code of especially moral or artistic values.” This, in turn, raises the question: Whose values? An individual’s? The organization’s? Society’s? All of these?

An effective board is concerned about integrity inside and outside the boardroom. It leads by example. The board plays a role in working with the CEO to help set the ethical tenor for the organization. It also promotes and monitors compliance with laws, regulations and organizational policies. Integrity in the boardroom is based on factors such as organizational values, the need to uphold the board’s fiduciary responsibilities and a willingness to be accountable.

A commitment to performance with integrity is widely recognized as a “must have” in organizations, yet many people and organizations struggle to put this ideal into practice. Board governance structures and practices should promote a corporate culture of integrity and ethics, coupled with corporate, environmental and social responsibility. The board should help to build trust and long-term relationships with shareholders, customers, regulators and employees.

The board’s role in maintaining integrity includes working with the CEO to establish the right tone at the top, understanding compliance requirements and establishing expectations for senior management, which then cascade to the entire organization. In addition, the board holds senior management accountable for meeting such expectations.

It is essential to understand that the cultural tone of an organization is the responsibility of the CEO. That cultural tone is effective only when there is the expectation that employees understand the boundaries established by the organization and the repercussions of crossing those lines. The organization should have an ethics policy or a code of conduct that is reviewed with each employee, director and member of management annually. These policies should also be made clear when new employees are onboarded.

It is recommended that company representatives at all levels affirm in writing that they understand the ethical guidelines, are fully compliant and are committed to reporting known violations. Highly effective organizations evaluate and compensate executives, including the CEO, based in part on their role in proactively promoting integrity and compliance. The board should confirm that integrity policies are established by management and that appropriate messaging is in place throughout the organization.

Organizations evaluate integrity performance through a number of qualitative and quantitative measures, including:

Monitoring and evaluating public scrutiny from the media, shareholders, customers and external watchdog agencies

Selecting and overseeing the activities of the auditors.

Understanding and approving waivers to the code of conduct (which should generally be rare and should be supported by a compelling business case).

According to the 2012 Board Practices Report: Providing Insight into the Shape of Things to Come, a publication from the Deloitte Center for Corporate Governance and the Society of Corporate Secretaries and Governance Professionals, cultural surveys are becoming a common practice among public companies. Forty-six percent of respondents said that cultural surveys of employees are conducted either annually or in certain circumstances, such as after an organizational restructuring. These surveys can be advantageous because they help boards and management get a sense of how effectively the tone at the top is being disseminated throughout the organization. The report also revealed that more public-company boards are reviewing cultural survey findings with management than in prior years, perhaps as a result of the new SEC whistleblower rules. In addition, approximately one-third of public-company respondents indicated that the board or audit committee has asked management to take specific steps to create or enhance a culture of candid and open communication since the SEC whistleblower rules took effect.

Whistleblower Effect: Past to Present

During the past decade, considerable attention has been given to whistleblowers and regulations to encourage whistleblowing without fear of retaliation. Whistleblower laws in the United States go back centuries. The first—the False Claims Act—was passed in 1863. The Securities Exchange Act of 1934 addressed corporate conduct relating to securities fraud after an initial public offering.

The term “whistleblower” was coined by Ralph Nader in the 1970s; he hoped to avoid the negative connotation of words such as “snitch” or “informant.” The Whistleblower Protection Act was passed in 1989 to protect government workers and established rules for informing the public and authorities about alleged illegal or ethical violations of laws, regulations or company policies. The Sarbanes-Oxley Act, passed in 2002, provided significant protections for corporate whistleblowers in publicly traded organizations. And, more recently, whistleblower provisions were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which enhances Sarbanes-Oxley initiatives and provides monetary incentives, compensation and protection for whistleblowers.

In response to the Dodd-Frank provisions, the SEC established the Office of the Whistleblower. The SEC’s most recent annual report on the Dodd-Frank Whistleblower Program revealed that more than 3,000 tips, complaints and referrals were received in 2012, with a majority concentrated in three areas: corporate disclosures and financials, offering fraud and manipulation. The report also noted that the first whistleblower payout was awarded in August 2012. This could set a precedent for others to come forward, and more payouts may be likely in the coming years.

Integrity Oversight Model

The Deloitte Governance Framework provides a model of leading practices for boards to consider in executing oversight responsibilities. Underlying each governance element are four attributes to help measure effectiveness: skills and knowledge, process, information and behavior. A board’s maturity with respect to each element may range from low to high, but the board should take the time to assess how well it believes it is performing. The following table outlines a maturity model that can be used to evaluate what likely constitutes a high-performing board for each attribute with respect to integrity governance.

Integrity Oversight Model

Effective Board Governance Principles

Integrity is critical to an organization’s sustained reputation and results. Effective boards help set the ethical tone for the entire organization and actively participate in programs designed to promote appropriate behavior with regard to compliance, integrity and ethics. A proactive role in continually setting standards and monitoring integrity is an effective way to guide an organization to improved principles, values and growth. Following are five principles for improving integrity in the boardroom:

1. Be active. The board should be informed about the organization and vigorous in management oversight.
2. Provide organizational leadership. The board, working with management, should set the organization’s strategic direction, review financial objectives and establish a strong ethical tone.
3. Comply with laws, regulations and ethics policies. The board should confirm that procedures and practices are in place to prevent and detect illegal or unethical conduct and to permit appropriate and timely action should such conduct occur.
4. Be informed, be transparent and listen. The board should take steps to confirm that management discloses fair, complete, accurate and timely information and that the organization maintains a two-way communication channel with the board.
5. Engage in continuous monitoring. The board should establish and review metrics related to ethical reporting and violations and remain aware of new developments in corporate governance that can help improve practices and procedures.

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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.